Comeback for the Pound

The British pound, so weak a few months ago that further devaluation was predicted, has put on a surprising comeback. In London last week, spot sterling hit $2.80, the highest since its brief upsurge last March when Chancellor of the Exchequer Richard ("Rab") Butler tightened Britain's belt another notch with a new Tory budget. Transferable sterling (i.e., pounds bought in the free markets outside the sterling bloc), which sold for $2.40 eleven months ago, was up to $2.70. Some of the sudden demand for pounds stemmed from speculators who had expected further devaluation and had sold sterling short. Now they had to buy pounds to cover. But the pound's new strength--and confidence on the part of world traders--was due to the solid progress the Conservative government has made towards putting Britain on its financial feet.

Encouraged by the good news, U.S. and British financial circles buzzed with talk that the pound may again be made convertible and freely exchanged for dollars or any other currency. Rab Butler helped fan the talk, told the Houce of Commons that "by degrees" the freeing of the British pound might indeed be a "step in the right direction." By week's end, the talk got another boost: the government announced that convertibility would be one of the chief topics at the opening this week of the Commonwealth Conference.

Run on the Bank. Great Britain was in no hurry to free its pound in view of its disastrous--and economically unsound --attempt to do so in 1947 when Britain's foreign trade was way out of balance.

This time the economic basis for convertibility is far sounder. Britain last week was closer to balancing her imports and her exports than she had been since 1945. For the first six months of 1952, Britain sold -L-24 million more goods than it bought from abroad. (In the last six months of 1951, Britain bought -L-394 million more goods than it sold.) Moreover, by September Britain had wiped out its entire deficit in the European Payments Union (a financial clearing house for England and Western European nations), and, for the first time had a surplus of credit.

Forward Step. To achieve this, Rab Butler has done more than restrict imports. He has fought inflation at home and cut consumer-spending by tighter restriction on credit, the reduction of food subsidies and other measures. These anti-consumption measures have worked. Tea (which was recently derationed) and other foods are now plentiful. Prices have risen enough so that buyers find themselves rationed by their own purses rather than government decree. Thus, Rab Butler has cut the amount of sterling needed for purchases abroad. He was also helped by the fall in world prices of commodities Britain buys, without a drop in the prices Britain gets for her goods abroad.

On the other hand, the Tories' deficit for the first six months of 1952 was some -L-589,400,000 ($1.6 billion), far more than they had estimated. To keep the benefits of the stronger pound, the Tories will have to find a way to slash spending. Even if the pound continues to rise, British economists guess that convertibility is still months away; that the government should wait until its dollar reserves are boosted from the present $1.7 billion to at least $3 billion. But even at best, pound convertibility would be limited to current accounts, would not affect the $10 billion in blocked sterling now held by India and other countries. Furthermore, at the start convertibility would probably only apply to the current earnings of non-sterling countries. There was no doubt that convertibility would be a great forward step. But it would be a permanent one only if Britain could also increase its productivity and boost exports (see below) while still supplying the home market with products it now lacks.

This file is automatically generated by a robot program, so reader's discretion is required.